CHAPTER 23 PERFORMANCE EVALUATION USING VARIANCES FROM STANDARD COSTS DISCUSSION QUESTIONS Standards are performance goals Manufacturing companies normally use standard cost for each of the three following product costs: a Direct materials b Direct labor c Factory overhead Standard cost systems enable management to determine the following: a How much a product should cost (standard cost) b How much it does cost (actual cost) Reporting by the “principle of exceptions” is the reporting of only variances (or “exceptions”) between standard and actual costs to the individual responsible for cost control This reporting allows management to focus on correcting cost variances The two variances in direct materials cost are: a Direct materials price b Direct materials quantity The offsetting variances might have been caused by the purchase of low-priced, inferior materials The low price of the materials would generate a favorable materials price variance, while the inferior quality of the materials would cause abnormal spoilage and waste, thus generating an unfavorable materials quantity variance a The two variances in direct labor costs are: (1) Direct labor rate (2) Direct labor time b The direct labor cost variance is usually under the control of the production supervisor No Even though the assembly workers are covered by union contracts, direct labor cost variances still might result For example, direct labor rate variances could be caused by scheduling overtime to meet production demands or by assigning higher-paid workers to jobs normally performed by lower-paid workers Likewise, direct labor time variances could result during the training of new workers or from a shortage of skilled employees Standards can be very appropriate in repetitive service operations Fast-food restaurants can use standards for evaluating the productivity of the counter and food preparation employees In addition, standards could be used to plan staffing patterns around various times of the day (e.g., increasing staff during the lunch hour) 23-1 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 23 Performance Evaluation Using Variances from Standard Costs DISCUSSION QUESTIONS (Continued) 10 a The variable factory overhead controllable variance results from incurring a total amount of variable factory overhead cost greater or less than the amount budgeted for the level of operations achieved The fixed factory overhead volume variance results from operating at a level above or below 100% of normal capacity b The factory overhead cost variance report presents the standard factory overhead cost variance data (that is, the volume and the controllable variance) Net unfavorable direct materials price variance Nonfinancial performance measures provide managers additional measures beyond the dollar impact of decisions Nonfinancial considerations may help the organization include external customer perspectives about quality and service in performance measurements These bring added perspectives in evaluating performance PRACTICE EXERCISES PE 23–1A a Direct materials price variance (favorable) b Direct materials quantity –$10,800 $13,600 [($33.25 – $34.00) × 14,400 gal.] [(14,400 gal – 14,000 gal.) × $34.00] variance (unfavorable) c Direct materials cost variance (unfavorable) $2,800 (–$10,800 + $13,600) or [($33.25 × 14,400 gal.) – ($34.00 × 14,000 gal.)] = $478,800 – $476,000 $2,250 [($3.00 – $2.50) × 4,500 lbs.] PE 23–1B a Direct materials price variance (unfavorable) b Direct materials quantity –$1,250 [(4,500 lbs – 5,000 lbs.) × $2.50] variance (favorable) c Direct materials cost variance (unfavorable) $1,000 ($2,250 – $1,250) or [($3.00 × 4,500 lbs.) – ($2.50 × 5,000 lbs.)] = $13,500 – $12,500 PE 23–2A a Direct labor rate variance (unfavorable) $8,850 [($30.50 – $30.00) × 17,700 hrs.] b Direct labor time variance (unfavorable) $6,000 [(17,700 hrs – 17,500 hrs.) × $30.00] c Direct labor cost variance (unfavorable) $14,850 ($8,850 + $6,000) or [($30.50 × 17,700 hrs.) – ($30.00 × 17,500 hrs.)] = $539,850 – $525,000 PE 23–2B a Direct labor rate variance (favorable) –$1,400 [($16.50 – $17.00) × 2,800 hrs.] b Direct labor time variance (favorable) –$3,400 [(2,800 hrs – 3,000 hrs.) × $17.00] c Direct labor cost variance (favorable) –$4,800 (–$1,400 – $3,400) or [($16.50 × 2,800 hrs.) – ($17.00 × 3,000 hrs.)] = $46,200 – $51,000 PE 23–3A Variable Factory Overhead Controllable Variance = $63,400 – [$3.50 × (3,500 units × hrs.)] Variable Factory Overhead = $63,400 – $61,250 Controllable Variance Variable Factory Overhead = $2,150 Unfavorable Controllable Variance PE 23–3B Variable Factory Overhead = $4,000 – [$1.40 × (1,000 units × 3.0 hrs.)] Controllable Variance Variable Factory Overhead Controllable Variance Variable Factory Overhead Controllable Variance PE 23–4A –$900 favorable PE 23–4B $300 unfavorable = $4,000 – $4,200 = –$200 Favorable $1.80 × [17,000 hrs – (3,500 units × hrs.)] $0.60 × [3,500 hrs – (1,000 units × hrs.)] PE 23–5A Work in Process (14,000* gal × $34.00) Direct Materials Quantity Variance** Materials (14,400 gal × $34.00) 476,000 13,600 489,600 * 3,500 units × standard gal per unit ** [(14,400 gal – 14,000 gal.) × $34.00] PE 23–5B Work in Process (5,000* lbs × $2.50) Direct Materials Quantity Variance** Materials (4,500 lbs × $2.50) 12,500 1,250 11,250 * 1,000 units × standard lbs per unit ** [(4,500 lbs – 5,000 lbs.) × $2.50] PE 23–6A GIOVANNI COMPANY Income Statement Through Gross Profit For the Year Ended December 31, 2014 Sales (3,500 units × $400) Cost of goods sold—at standard* $1,400,000 1,093,750 Gross profit—at standard $ 306,250 Favorable Less variances from standard cost: Direct materials price (PE23–1A) Direct materials quantity (PE23–1A) Direct labor rate (PE23–2A) Direct labor time (PE23–2A) Factory overhead controllable (PE23–3A) Factory overhead volume (PE23–4A) Unfavorable $10,800 $13,600 8,850 6,000 2,150 900 Gross profit * Direct materials (3,500 units × gal × $34.00)…………………………………………………… Direct labor (3,500 units × hrs × $30.00)……………………………………………………… Factory overhead [3,500 units × hrs × ($3.50 + $1.80)]……………………………………… Cost of goods sold at standard……………………………………………………………………… (18,900) $ 287,350 $ 476,000 525,000 92,750 $1,093,750 PE 23–6B DVORAK COMPANY Income Statement Through Gross Profit For the Year Ended December 31, 2014 Sales (1,000 units × $90) Cost of goods sold—at standard* $90,000 69,500 Gross profit—at standard $20,500 Favorable Less variances from standard cost: Direct materials price (PE23–1B) Direct materials quantity (PE23–1B) Direct labor rate (PE23–2B) Direct labor time (PE23–2B) Factory overhead controllable (PE23–3B) Factory overhead volume (PE23–4B) Unfavorable $2,250 $1,250 1,400 3,400 200 300 Gross profit * Direct materials (1,000 units × lbs × $2.50)…………………………………………………… Direct labor (1,000 units × hrs × $17.00)……………………………………………………… Factory overhead [1,000 units × hrs × ($1.40 + $0.60)]……………………………………… Cost of goods sold at standard…………………………………………………………………… 3,700 $24,200 $12,500 51,000 6,000 $69,500 PE 23–7A Number of employee errors…………………………………………………………… Input Number of times paper supply runs out…………………………………………… Input Copy machine downtime (broken)…………………………………………………… Input Number of pages copied per hour…………………………………………………… Output Number of customer complaints………………………………………………………Output Percent jobs done on time………………………… ………………………………… Output PE 23–7B Number of times ingredients are missing……………………………………………Input Number of customer complaints………………………………………………………Output Number of hours kitchen equipment is down for repairs…………………………Input Number of server order mistakes………………………………………………………Input Percent of meals prepared on time……………………………………………………Output Number of unexpected cook absences………………………………………………Input EXERCISES Ex 23–1 Ingredient Cocoa Sugar Milk Quantity 650 lbs 200 lbs 150 gal × Price × $0.90 per lb $1.50 per lb $2.10 per gal × × Total cost Total $ 585 300 315 $1,200 Standard direct materials cost per bar of chocolate: = $0.25 per bar $1,200 per batch 4,800 bars Ex 23–2 a b Direct labor………………………………………… $18.00 × 2.0 hrs Direct materials…………………………………… $15.00 × 20 bd ft Variable factory overhead……………………… $2.75 × 2.0 hrs Fixed factory overhead…………………………… $1.25 × 2.0 hrs Total cost per unit……………………………… $ 36.00 300.00 5.50 2.50 $344.00 A standard cost system provides Wood Designs’ management a cost control tool using the principle of management by exception Using this principle, costs that deviate significantly from standards can be investigated and corrected The standard cost system also can be used to motivate employees to work efficiently with their time, use of materials, and other factory overhead resources Ex 23–3 TIME IN A BOTTLE COMPANY Manufacturing Cost Budget For the Month Ended May 31, 2014 a Standard Cost at Planned Volume (600,000 Bottles) Manufacturing costs: Direct labor Direct materials Factory overhead $10,800 49,500 3,000 $63,300 Total $1.80 × (600,000 ÷ 100) = $10,800 $8.25 × (600,000 ÷ 100) = $49,500 $0.50 ì (600,000 ữ 100) = $3,000 Note: The cost standards are expressed as “per 100 bottles.” TIME IN A BOTTLE COMPANY b Manufacturing Costs—Budget Performance Report For the Month Ended May 31, 2014 Standard Cost at Cost Variance— Manufacturing costs: Direct labor Direct materials Factory overhead Total manufacturing cost Actual Actual Volume (Favorable) Costs (610,000 Bottles) Unfavorable $ 9,890 48,450 3,460 $61,800 $10,980 50,325 3,050 $64,355 $(1,090) (1,875) 410 $(2,555) $1.80 ì (610,000 ữ 100) = $10,980 $8.25 × (610,000 ÷ 100) = $50,325 $0.50 × (610,000 ÷ 100) = $3,050 c Time in a Bottle Company’s actual costs were $2,555 less than budgeted Favorable direct labor and direct material cost variances more than offset a small unfavorable factory overhead cost variance Note to Instructors: The budget prepared in part (a) at the beginning of the month should not be used in the budget performance report because actual volumes were greater than planned (610,000 vs 600,000) Ex 23–4 a Price variance: Direct Materials = (Actual Price – Standard Price) × Actual Quantity Price Variance Direct Materials = ($2.60 per lb – $2.50 per lb.) × 53,500 lbs Price Variance Direct Materials = $5,350 Unfavorable Price Variance Quantity variance: Direct Materials = (Actual Quantity – Standard Quantity) × Standard Price Quantity Variance Direct Materials = (53,500 lbs – 55,120 lbs.) × $2.50 per lb Quantity Variance Direct Materials = –$4,050 Favorable Quantity Variance Total direct materials cost variance: Direct Materials Cost Variance = Direct Materials Price Variance + Direct Materials Quantity Variance Direct Materials = $5,350 – $4,050 Cost Variance Direct Materials = $1,300 Unfavorable Cost Variance b The direct materials price variance should normally be reported to the Purchasing Department, which may or may not be able to control this variance If materials of the same quality were purchased from another supplier at a price higher than the standard price, the variance was controllable However, if the variance resulted from a market-wide price increase, the variance was not subject to control The direct materials quantity variance should be reported to the proper level of operating management For example, if lower amounts of direct materials had been used because of production efficiencies, the variance would be reported to the production supervisor However, if the favorable use of raw materials had been caused by the purchase of higher-quality raw materials, the variance should be reported to the Purchasing Department The total materials cost variance should be reported to senior plant management, such as the plant manager or materials manager Ex 23–5 Price variance: Direct Materials = (Actual Price – Standard Price) × Actual Quantity Price Variance Direct Materials = ($6.50 per unit* – $6.90 per unit) × 450 Price Variance Direct Materials = –$180 Favorable Price Variance * $2,925 ÷ 450 units = $6.50 per unit Quantity variance: Direct Materials Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price Direct Materials Quantity Variance = (450 units – 430 units) × $6.90 per unit Direct Materials Quantity Variance = $138 Unfavorable Total direct materials cost variance: Direct Materials Cost Variance = Direct Materials = Direct Materials Price Variance + Direct Materials Quantity Variance –$180 + $138 Cost Variance Direct Materials = –$42 Favorable Cost Variance COMPREHENSIVE PROBLEM Part A Variable Cost per Unit = Variable Cost per Unit = Difference in Total Cost Difference in Production $740 – $600 1,200 cases – 500 cases = $0.20 per case Total Cost = (Variable Cost per Unit × Units of Production) + Fixed Cost At the high point: At the low point: $740 = ($0.20 × 1,200 units) + Fixed Cost $600 = ($0.20 × 500 units) + Fixed Cost Fixed Cost = $500 Fixed Cost = $500 Selling price……………………………………………………………… Less variable costs per case: Direct materials……………………………………………………… Direct labor…………………………………………………………… Utilities [see part (1)]………………………………………………… Selling expenses…………………………………………………… Total variable costs per case………………………………………… Contribution margin per case………………………………………… $100.00 $17.00 7.20 0.20 20.00 44.40 $ 55.60 Total fixed costs: Utilities [see part (1)]……………………………………………………………… Facility lease………………………………………………………………………… Equipment depreciation………………………………………………………… Supplies……………………………………………………………………………… $ 500 14,000 4,300 660 $19,460 Break-Even Sales (units) = Break-Even Sales (units) = Fixed Costs Unit Contribution Margin $19,460 $55.60 = 350 cases COMPREHENSIVE PROBLEM (Continued) Part B GENUINE SPICE INC Production Budget For the Month Ended August 31, 2014 Cases Expected cases to be sold Plus desired ending inventory 1,500 175 Total Less estimated beginning inventory 1,675 300 1,375 Total units to be produced GENUINE SPICE INC Direct Materials Purchases Budget For the Month Ended August 31, 2014 Units required for production Plus desired ending inventory Cream Natural Base (ozs.) Oils (ozs.) 137,500 1,000 Less estimated beginning inventory Direct materials to be purchased × Unit price (250) 41,250 360 (290) 16,500 240 Total (600) 138,250 $0.02 41,320 $0.30 16,140 $0.50 $2,765 $12,396 $8,070 Total direct materials to be purchased 1 Bottles (bottles) $23,231 Cream base: 1,375 cases × 100 ozs = 137,500 ozs Natural oils: 1,375 cases × 30 ozs = 41,250 ozs Bottles: 1,375 cases × 12 bottles = 16,500 bottles GENUINE SPICE INC Direct Labor Budget For the Month Ended August 31, 2014 Mixing Filling Total Hours required for production of: Hand and body lotion 4581 1152 × Hourly rate $18.00 $14.40 Total direct labor cost $8,244 $1,656 Mixing: (1,375 cases ì 20.00 min.) ữ 60 = 458 hrs Filling: (1,375 cases × 5.00 min.) ÷ 60 = 115 hrs $9,900 COMPREHENSIVE PROBLEM (Continued) GENUINE SPICE INC Factory Overhead Budget For the Month Ended August 31, 2014 Fixed Factory overhead: Utilities Facility lease Equipment depreciation Supplies $ 500 14,000 4,300 660 $19,460 Total Variable $275 $275 Total $ 775 14,000 4,300 660 $19,735 Fixed costs [from part (3)] Variable utility cost: $0.20 × 1,375 cases = $275 GENUINE SPICE INC Budgeted Income Statement For the Month Ended August 31, 2014 $150,000 Sales Finished goods inventory, August $12,000 Direct materials inventory, August Direct materials purchases [from part (6)] Less direct materials inventory, August 31 $ Cost of direct materials for production Direct labor [from part (7)] Factory overhead [from part (8)] $23,871 9,900 19,735 Less finished goods inventory, August 31 Cost of goods sold 392 23,231 248 53,506 7,000 Gross profit Selling expenses Income before income tax 58,506 $ 91,494 30,000 $ 61,494 Sales: 1,500 cases × $100 per case = $150,000 Direct materials inventory, August 1: (250 × $0.020) + (290 × $0.300) + (600 × $0.500) = $392 Direct materials inventory, August 31: (1,000 × $0.020) + (360 × $0.300) + (240 × $0.500) = $248 Selling expenses: 1,500 cases × $20 per case = $30,000 COMPREHENSIVE PROBLEM (Continued) Part C 10 Direct Materials Price Variance: Actual price………………………… Standard price……………………… Difference…………………………… × Actual quantity (units)*………… Direct materials price variance… $ Cream Natural Base Oils 0.016 0.020 $ (0.004) 153,000 ozs $ (612) F $ $ 0.32 0.30 0.02 46,500 ozs $ 930 U Bottles $ 0.42 0.50 $ (0.08) 18,750 btls $ (1,500) F * Actual quantity: Cream base: 1,500 cases × 102 ozs = 153,000 ozs Natural oils: 1,500 cases × 31 ozs = 46,500 ozs Bottles: 1,500 cases × 12.5 bottles = 18,750 bottles The fluctuation in market prices caused the direct material price variances Prices increased for natural oils compared to standard and declined for cream base and bottles compared to standard COMPREHENSIVE PROBLEM (Continued) Direct Materials Quantity Variance: Actual quantity ………………………… Standard quantity …………………… Cream Natural Base Oils 153,000 ozs 150,000 Difference……………………………… × Standard price……………………… Direct materials quantity variance… Bottles 46,500 ozs 45,000 18,750 btls 18,000 3,000 ozs $ 0.020 1,500 ozs $ 0.300 750 btls $ 0.500 $ $ $ 60 U 450 U 375 U Note: All the direct materials quantity variances were unfavorable, indicating some material losses, scrap, and quality rejections All the quantity variances were unfavorable because the standards were set at ideal quantity amounts Thus, only unfavorable variances were possible The standard quantities were ideal standards for 12 8-ounce bottles per case (96 ozs total), as shown below Actual quantity: Cream base: 1,500 cases × 102 ozs = 153,000 ozs Natural oils: 1,500 cases × 31 ozs = 46,500 ozs Bottles: 1,500 cases × 12.5 bottles = 18,750 bottles Standard quantity: Cream base: 1,500 cases × 100 ozs = 150,000 ozs Natural oils: 1,500 cases × 30 ozs = 45,000 ozs Bottles: 1,500 cases × 12 bottles = 18,000 bottles COMPREHENSIVE PROBLEM (Continued) 11 Direct Labor Rate Variance: Mixing Filling Department Department Actual rate……………………………………………………… $18.20 18.00 Standard rate…………………………………………………… Difference………………………………………………………… $ 0.20 488 × Actual time (hours) ………………………………………… Direct labor rate variance…………………………………… $97.60 U $ 14.00 14.40 $ (0.40) 140.00 $ (56.00) F The Mixing Department has an unfavorable direct labor rate variance from using a higher classification of labor The higher labor classification cost an additional $0.20 per hour The Filling Department has a favorable direct labor rate variance due to using a lower classification of labor The lower labor classification saved $0.40 per hour Direct Labor Time Variance: Actual time (hours) …………………………………………… Standard time (hours) ………………………………………… Difference……………………………………………………… × Standard rate………………………………………………… Direct labor time variance…………………………………… Mixing Filling Department Department 488 500 140 125 (12) $ 18 15 $14.40 $(216) F $ 216 U Actual time: Mixing: (1,500 units ì 19.50 min.) ữ 60 = 488 hrs Filling: (1,500 units × 5.60 min.) ÷ 60 = 140 hrs Standard time: Mixing: (1,500 units ì 20.00 min.) ữ 60 = 500 hrs Filling: (1,500 units ì 5.00 min.) ữ 60 = 125 hrs The Mixing Department is producing at a labor time that is slightly better than standard, thus producing a favorable direct labor time variance This may be the result of using a higher grade of labor The net impact for the Mixing Department is favorable by $118.40 ($97.60 – $216) The Filling Department had an unfavorable direct labor time variance This may be the result of using a lower grade of labor in the department The net impact for the department is unfavorable by $160.00 ($216.00 – $56.00) Thus, the savings in the labor rate from using a lower grade classification of labor was insufficient to offset the loss of efficiency from such labor COMPREHENSIVE PROBLEM (Continued) 12 Factory Overhead Controllable Variance: Actual variable overhead……………………………………………………… Variable overhead at standard cost*………………………………………… Factory overhead controllable variance…………………………………… $305 300 $ U * Variance overhead (utility cost) at standard cost: $0.20 × 1,500 cases = $300 13 Factory Overhead Volume Variance: 1,600 Normal volume (cases)……………………………………………………… 1,500 Actual volume (cases)………………………………………………………… 100 Difference………………………………………………………………………… $ 12.1625 × Fixed factory overhead rate*……………………………………………… $1,216.25 U * Fixed factory overhead rate: $19,460** ÷ 1,600 cases = $12.16 per case ** Total fixed factory overhead shown in part (8) The unfavorable volume variance indicates the cost of underused capacity of 100 cases per month COMPREHENSIVE PROBLEM (Concluded) Alternative Computation of Overhead Variances Factory Overhead Actual costs ($19,460 + $305) Balance (underapplied) Actual 19,765.00 Applied costs [1,500 × ($12.1625 + $0.20)] 1,221.25 Budgeted Factory Overhead for Amount Factory Overhead Applied Factory Produced Overhead Variable cost (1,500 × $0.20)…………… $ $19,765.00 18,543.75 Fixed cost………………………………… Total……………………………………… 300 19,460.00 $18,543.75 $19,760.00 $5 U $1,216.25 U Controllable Volume Variance Variance $1,221.25 U Total Factory Overhead Cost Variance 14 The production volume of 1,375 cases determined in part (5) was planned at the beginning of August The variances compare the actual cost and the standard cost of actual production for the month Thus, the standard cost must be based on the 1,500 units of actual production This amount is compared with an actual cost also based on 1,500 units The variable costs of the budget must flex to the actual production volume so that variances are compared across the same production volume CASES & PROJECTS CP 23–1 The use of ideal standards is a legitimate concern for Henry It is likely that such standards are too tight and not include the necessary fatigue factors that are likely in this type of operation It seems as though Henry is arguing for practical standards that can be attained if the operation is running well Maybe some standard in between is warranted, but that is not the issue The issue is Dash’s method of operation Dash has effectively agreed to have this dispute arbitrated with a senior official However, Dash is trying to seal the fate of the argument behind the scenes, before the issue is discussed openly, as agreed Moreover, Dash is attributing poor motives to Henry behind his back Dash may have short-term success with this method of operation, but in the long term he will likely alienate himself within the organization He may create a distrustful environment that would eventually hamper his ability to provide open, honest feedback People may eventually avoid him and hide the truth from him CP 23–2 Although the Tungston Company performance measurement system uses both financial and nonfinancial measures, there may still be some serious performance omissions The financial measures are good measures of financial performance Likewise, employee satisfaction should be measured, since satisfied employees may lead to overall business success There is, however, at least one major shortcoming to the proposed measures None of the three measures has a customer orientation The management of Tungston Company should also select a performance measure that reflects how well the business is performing from a customer’s perspective Thus, measures about customer satisfaction, product quality, warranty experience, or on-time delivery would be excellent additions to the three measures already proposed CP 23–3 This is a case where there is strong evidence that the poor performance that is occurring inside the Assembly Department may be the result of behaviors outside of the department This is one of the classic problems with variance analysis Often, the variances reflect causes outside of the responsibility center manager’s control That is what appears to be happening here The Assembly supervisor complains that both the purchased parts and incoming material from the Fabrication Department have been giving trouble A review of performance reports reveals the following: (1) the materials price variance is very favorable; (2) the Fabrication Department’s labor time variance is also very favorable A possible explanation is that the Purchasing Department found a low-price supplier The low price translated into a favorable variance Unfortunately, it appears the company is “getting what it paid for.” Specifically, it appears that the quality of the purchased parts has gone down, thus making assembly much more difficult in the Assembly Department The Fabrication Department may be performing work faster than standard—again, resulting in a favorable labor time variance It may be that the department is working too fast Specifically, the speed is resulting in poor fabrication quality Again, the Assembly Department is bearing the cost of poorly fabricated parts The problem in both instances is that the variances measure only productivity and price savings but not quality As a result, there are strong incentives to purchase from lowest bidders, work fast, cut corners, and push work on through Unfortunately, the company is worse off, as a whole, due to this set of situations The sum of the unfavorable variances in Assembly exceeds the favorable variances in the other departments The analyst will need to confirm these suspicions If they are supported, the company may wish to introduce quality measures in addition to the variance information in order to avoid the counterproductive behaviors in Purchasing and Fabrication CP 23–4 The plant manager is placing pressure on the controller because the controllable variance is very unfavorable The claim is that these costs are not really variable at all This is a very difficult claim to accept This is a small company, so it purchases its power from the outside The power and light bill is variable to the amount of energy used in the plant Energy usage is likely a function of the number of units produced except for the power required to keep the business open Likewise, the supplies are likely variable to machine usage, which is also related to the number of units produced However, these two costs are not where the problem lies The problem is with the indirect factory wages The indirect wages may not be completely variable However, the variance is $8,500, or 28% higher than the standard This is much greater than the 10% difference between the existing production volume and full capacity In other words, even granting the plant manager’s position on the indirect wages still does not explain the overall size of the variance More is being spent on indirect wages than would be implied by even 100% production Something appears amiss The controller should discuss these matters with the plant manager and attempt to discover why the indirect labor costs are so completely out of line with the standards The plant manager has not complained about the standards yet but may so in the future It’s very common for the standards to be criticized as too tight CP 23–5 Use this activity to compare performance measures from different groups and their selected cities The following are examples of performance measures from Worcester, Massachusetts: ECONOMIC DEVELOPMENT Indicator Outcome Type Measured As Growth of commercial and residential tax base Performance Change in total assessed value over time Job growth Performance Jobs created (and lost) by category Amount of private investment Performance Total annual new construction, business expansion, and R&D investment PUBLIC SAFETY Indicator Outcome Type Measured As All measured both citywide and by neighborhood Level of crime Performance Crime rate and clearance rate by type of crime Police community relations Performance Responses to annual citizen survey questions, performance of personnel on tests of courtesy, professionalism, and respect Allegations of police misconduct Performance The annual number of complaints of excessive force received by the police department Level of fire activity Performance # of structure fires; # of fire inspections performed; # of arson cases Responses to fire calls Performance # of fire calls answered as a % of total calls for service, average response time, % of responses < minutes CP 23–5 (Continued) IMPROVED MUNICIPAL SERVICES Indicator Outcome Type Measured As Cleanliness of streets Performance Responses to questions on the annual citizen survey, objective resident ratings Cleanliness of streets Efficiency Cost per mile of street swept Snow clearance Performance Miles of road cleared to pavement within hours of a snowstorm Condition of streets and roads Performance Responses to questions on the annual citizen survey, Pavement Condition Index (PCI) Effectiveness of recycling program Performance % of trash recycled Effectiveness of anti-graffiti program Performance # of graffiti incident responses, response time from call for service to cleanup Cost effectiveness of solid waste collection Efficiency Cost per ton of waste collected Library usage Performance Circulation per capita Citizen involvement (citywide and by neighborhood) Performance % of eligible voters registered; % of registered voters voting EDUCATION Indicator Outcome Type Measured As Student and school achievement Performance MCAS test scores Graduation rate Performance Percent graduating Dropout rate Performance Percent dropouts Employer satisfaction with graduates Performance Employer survey Post-graduate plans Parent involvement in schools Percent of graduates going to college; percent going to work Performance Attendance at parent-teacher conferences; survey of parents, teachers, and principals CP 23–5 (Concluded) IMPROVED YOUTH SERVICES Indicator Outcome Type Measured As Presence of “at risk youth” Performance Responses to questions from the Youth Risk Behavior Survey (includes questions on drug and alcohol use and violent behavior) by high school Extent of juvenile crime Performance Juvenile crime rate, citywide and by neighborhood Teen pregnancies Performance Teen pregnancy rate Infant mortality Performance Infant mortality rate Teen youth services Program availability Number of programs and participation rates (by race, ethnicity, and gender) by neighborhood Source: Benchmarking Municipal Performance: A Tool for Streamlining Municipal Government; Michael D Goodman and Roberta R Schaefer, Worcester Municipal Research Bureau ... materials price (PE23–1A) Direct materials quantity (PE23–1A) Direct labor rate (PE23–2A) Direct labor time (PE23–2A) Factory overhead controllable (PE23–3A) Factory overhead volume (PE23–4A) Unfavorable... materials price (PE23–1B) Direct materials quantity (PE23–1B) Direct labor rate (PE23–2B) Direct labor time (PE23–2B) Factory overhead controllable (PE23–3B) Factory overhead volume (PE23–4B) Unfavorable... Variance PE 23 4A –$900 favorable PE 23 4B $300 unfavorable = $4,000 – $4,200 = –$200 Favorable $1.80 × [17,000 hrs – (3,500 units × hrs.)] $0.60 × [3,500 hrs – (1,000 units × hrs.)] PE 23 5A Work